There are major problems associated with using the traditional method of completing a financial transaction in the credit and debit card industries at the present time.
A first problem is the fraudulent use of a financial card, particularly a debit financial card. The issue is that those institutions responsible for financial card transactions would rather have a convenient, easy and short customer experience, when conducting a financial card transaction, rather than a secure transaction. This is to induce the cardholder to use the card more frequently in order for the financial network provider to receive interchange fees for the transaction, to have the use of the customer's money and to collect interest on credit transactions. The financial network providers such as Visa, MasterCard, and American Express push the responsibility for fraudulent use and monetary loss from card fraud to the bank, who issue the cards and hold the card accounts, or the processor who manages the financial transaction for the bank, or the merchant who accepts the transaction. The network providers only worry about facilitating the transactions and not the fraud costs. The consumers have convenience and quick access to money and take no risks which will encourage more uses and risky behavior. Neither the network providers nor the consumers have much concern about fraud. It is the banks, the card processor, and the merchants, who use the financial networks that are taking on all the financial risks.
A second issue is the cost of using an open loop financial network from the major network providers such as Visa, MasterCard, Discover and American Express. An interchange fee is being charged every time a financial transaction takes place between the merchant and the consumer. The merchant pays the interchange fee to the network and not the bank. The bank, its processor and merchants bear the monetary cost if a fraudulent transaction takes place. They are the parties that assume the financial responsibilities for any fraud occurred within the financial card transaction system.
A solution to minimize fraud is to have the cardholder prove his or her right to use or ownership of the card, using digital secured data or bio-identification methods, when conducting a financial card transaction. A solution to minimize the high interchange fees for conducting a financial card transaction is to bypass the major open loop networks and switch the card, for some transactions, to a private or commercial closed loop network for POS devices residing within merchant groups.
Regarding the issue of fraudulent usage, a processing software application has been developed that can interrupt a financial card transaction by allowing a card processor or a consumer to toggle a financial card between on or off positions by using the internet, a home phone, a mobile phone or a computer. The on position corresponds to a financial card that is enabled to conduct a financial transaction, while the off position corresponds to a disabled financial card that will not be then approved to conduct a financial transaction. The same software application can also notify the card holder, via SMS text to the card holder's mobile phone or via email, of any transaction either conducted or attempted. A fraudulent financial card transaction is, however, possible if the card is in the thief's hand while in the on or enabled mode regardless if the card is forged or stolen. A transaction can be allowed to go through if the merchant does not check the holder's identification or a debit card transaction could be completed using the credit card function.
Regarding the issue of high interchange fees, a processing software platform has also been developed, as based upon the above-noted processing software application, so as to work with a merchant card processor to build a switch at a merchant point-of-sale (POS) system to channel a financial transaction to a private or a commercial network within the merchant stores and not to use a major open loop network, as such are well known and include high interchange fees. The issue is how to build a closed loop system that can reroute some merchant transactions and allow other transactions to go through the open loop networks to complete the transaction.